Aetna Inc (AET.N) has returned to the catastrophe bond market with an upsized $150 million deal, after the U.S. health insurer decided to sell an extra layer of protection on its existing reinsurance programme less than five months after it closed its Vitality Re transaction.
Standard & Poor’s (S&P) assigned BBB and BB+ ratings respectively to the Class A and B notes to be issued by Vitality Re II Ltd, the credit rating agency said in a statement.
Insurers and reinsurers use catastrophe bonds to transfer major risks on their books, such as storms and earthquakes, to capital markets investors, thus releasing capital to underwrite new insurance business.
The latest risk transfer contract will be issued through Cayman Islands-based Vitality Re provides $150 million of excess of loss reinsurance coverage on a portion of Aetna’s group commercial health insurance business.
“The notes cover claims payments of Health Re Inc., and ultimately, Aetna Life Insurance Co. (ALIC), relating to the covered insurance business to the extent that the medical benefits ratio (MBR) exceeds the class-specific MBR attachment levels,” S&P said in a statement late on Thursday.
The insurer launched a $105 million deal to capital market investors at the beginning of April under its Vitality Re Ltd special purpose vehicle, but it was increased during marketing due to increased investor appetite for a non-peak peril.
Aetna closed its three-year class A notes at $110 million, and the Class B notes at $40 million said S&P.
Pricing was increased from the original guidance, coming in at 440 basis points over Libor for the Class A notes and at 625 basis points over Libor for the Class B notes, according to S&P.
The two tranches of notes will mature in January 2014.
The new transaction adds an extra layer of protection to the Aetna-sponsored notes from its previous Vitality Re Ltd transaction, which closed in December, and brings the total amount of coverage through the catastrophe bond programme to $300 million.
“Vitality Re II will invest the proceeds from the sale of the notes into two separate collateral accounts and enter into a separate tri-party repurchase (repo) agreement with Goldman Sachs & Co (GS.N) for each class of notes,” said S&P.
Goldman Sachs, as repurchase counterparty, will enter into master repurchase agreements with Vitality Re.
Under the tri-party repo agreements, Goldman Sachs will make a quarterly payment equal to three-month LIBOR to Vitality Re II. This payment plus the quarterly premium payment Vitality Re II receives from Health Re under the XOL agreements will equal the interest payments due on the notes, S&P said.